Dow Rises 287 Points Because...Nothing’s Really Wrong?

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Evie Liu

Updated Oct. 12, 2018 7:02 p.m. ET

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To be continued. After a nerve-racking day of ups and downs, the market finally closed in the black. The
Dow Jones Industrial Average
gained 287.16 points on Friday, up 1.2%, to 25,339.99. The
S&P 500
rose 1.4%, and the
Nasdaq Composite
advanced 2.3%, driven by tech stocks’ strong comeback. But all three indexes are still lower for the week. It remains to be seen whether this will mark an end to the latest selloff. In today’s After the Bell, we…

…examine where fears and hopes are hiding;

…consider that maybe the selloff means strength is broadening;

…and explain why Netflix shot to the top of the S&P 500.

What Were We Afraid Of?

The fourth quarter so far has been pretty rough for investors, with the S&P 500 falling 5% in October after back-to-back 2% declines this past Wednesday and Thursday.

There has been much speculation about the reasons behind the selling—the Federal Reserve’s rate increases, trade tensions, or simply fatigue late in an economic cycle. Brent Schutte of Northwestern Mutual Wealth Management thinks these worries are at best negligible.

Trade friction in general has decreased in the fourth quarter after the U.S., Mexico, and Canada reached a deal to replace the old Nafta framework, Schutte writes in a Friday note. “The issue is gradually narrowing from worry of a global trade war to a spat between the U.S. and China—an important development with regard to overall economic and market risk,” he writes.

Many worry that the Fed’s tightening could lead the U.S. into a recession, but Schutte doesn’t think that is likely. “After the Great Inflation of the late 1970s/early 1980s, the Fed was laser-focused on not letting the inflation boogeyman out of the bag at all costs, even if it meant potentially sacrificing additional future economic and employment growth,” he writes.

Inflation has since been kept at bay, and the central bank has been focusing more on economic and employment growth rather than curbing inflation since the 2008 financial crisis, writes Schutte. The Fed will continue the tightening with a “velvet touch” and calibrate carefully.

Here’s more evidence of investor confidence. The long-term yield curve between 30-year and 10-year Treasury notes flattened sharply during the January correction, but over the past few days, it has actually steepened. That is a sign of improved forward growth outlook, writes Thomas Lee, strategist from Fundstrat.

The game of “musical chairs” in the latest selloff suggests widening strength in the market, Lee notes in a Friday report. In the eight trading days since Oct. 3, six sectors have outperformed despite lagging for most of the year: Energy; Financials; Real Estate; Health Care; Consumer Staples; and Utilities. Similarly, value stocks have also outperformed by a large margin after being under the water for a long time. Lee views this as a broadening of the market rally this year, rather than a flee toward defensive stocks.

“We believe the strong seasonals will be dominant in 2018, meaning stocks will rise, both from earnings season (even if guidance isn’t spectacular) and from post-midterm rally,” Lee writes. He suggests that investors buy this pullback.

Cross your fingers for Monday.

The Hot Stock

Netflix (NFLX) rocked to the top of the S&P 500 on Friday, helped by Citigroup, which said that investors should buy the stock after the recent selloff.

Netflix gained $18.46, or 5.8%, to $339.56.

Citi’s Mark May raised his rating on Netflix to Buy from Neutral, with a $375 price target. He points to the recurring subscription revenue that Netflix enjoys, and management’s history of strong execution. The move comes after the recent market declines that have seen tech stocks hit especially hard.

Year to date, Netflix is up 76.7% and it’s gained 73.4% in the past 12 months.

The Biggest Loser

PNC earned $2.82 a share on revenue of $4.36 billion. Analysts were looking for earnings of $2.72 on revenue of $4.3 billion.

Despite the top- and bottom-line beat, investors may have been disappointed by loan growth and expenses that missed expectations. Still, Sandler O’Neill’s R. Scott Siefers reiterated a Buy rating and $145 price target, writing that “the positives overwhelmed the negatives” and that the “ violent stock price reaction was overdone.”

Year to date, PNC is down 13.9% and it’s lost 8.1% in the past 12 months.

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